Sub-participation

Practical Law UK Glossary 1-107-7333 (Approx. 3 pages)

Glossary

Sub-participation

Also called participation. The terms sub-participation and participation have no strict legal meaning. In the context of finance transactions, they refer to an agreement between a lender and another entity under which the lender transfers or reduces all or part of its economic risk under a loan agreement in, normally, one of two different ways. The agreement is typically called a sub-participation or participation agreement, and the borrower is generally not a party to it and will frequently be unaware of it.

The two normal types of sub-participation are known as funded participation and risk participation:

In a funded participation, the parties agree that the participant will fund the lender in relation to drawdowns already made or drawdowns which have not yet been made. In return, the lender pays a fee to the participant and passes principal and interest on to it when these are received by it from the borrower.
In a risk participation, the parties agree that the participant will reimburse the lender for amounts which the borrower fails to pay under the loan agreement. In contrast with a funded participation, the participant does not provide funds to the lender in relation to drawdowns. In return for the assumption of the reimbursement obligation by the participant, the lender pays a fee to the participant. A risk participation is similar in effect to an indemnity.

For further information, see Practice note, Trading performing loans: overview: Sub-participation.

Sub-participation | Practical Law